During the last week of September, reports surfaced that Alaskan oil producer ConocoPhillips (COP) has recently exported an 800 MBbl cargo of Alaska North Slope (ANS) crude to South Korea. This is the first such export since 2006 and marks a new development in the evolving debate over US crude oil exports that are heavily restricted by regulations that date back to the 1970’s. Today we look at the fundamentals behind COP’s export shipment.
ANS crude – a medium sour grade with 31.5 degrees API gravity and about 1 percent sulfur - is produced from the Prudhoe Bay field on the northern coast of Alaska beside the Beaufort Sea (see After The Oil Rush). Production started in 1977 after the Mid-East oil crisis raised crude prices enough to justify construction of an $8B pipeline from Prudhoe Bay to Valdez marine terminal. From there ANS is shipped to refineries in Washington State and California by a dedicated fleet of 11 “Jones Act” tankers (see Rock the Boat). We have previously documented the decline in ANS crude production (according to the Energy Information Administration (EIA) from its heyday 2MMb/d in the 1980’s to 515 Mb/d in 2013 (see After the Oil Rush). So far this year average ANS production is down to 505 Mb/d according to daily tallies from the Alaska Department of Revenue.
Although almost all ANS production (apart from local refinery consumption in Alaska) goes to the US West Coast, it can also be exported. We have posted a number of blogs covering the export laws dating back to the 1970’s that forbid the export of US crude except to Canada without a special license (see I Fought the Law). However an amendment to the regulations in 1996 permits the export of Alaskan crude. That amendment has one important caveat – namely that any Alaska crude that has passed through the Trans Alaska Pipeline (TAPS) can only be exported using a US flag vessel that conforms to the Jones Act (see The Sea and Mr. Jones for more on the Jones Act). Since almost all Alaska production comes from Prudhoe Bay and passes through TAPS, it follows that exports have to be made using Jones Act vessels. Such vessels typically add several dollars per barrel to shipping costs versus using similar ships from overseas fleets. The recent COP shipment to South Korea was on the Jones Act tanker Polar Discovery that is operated by Polar Tankers – a COP shipping subsidiary that operates the company’s Alaska fleet. In the short term, since this tanker is otherwise being used to ship crude from Valdez to the West Coast, the cost of shipping is a wash for COP – i.e. they would already be paying for the cost of a tanker they own – wherever it ships crude. However, the higher Jones Act shipping costs do make Alaska barrels less competitive than crudes shipped on international tankers – e.g. from the Middle East to Asia.
Although ANS crude production has fallen, it is still considered the benchmark that sets the price West Coast refiners pay for their crude. ANS prices have traditionally been linked closely to international benchmark Brent, rather than the U.S. benchmark West Texas Intermediate (WTI) because ANS competes with imported crudes that are priced against Brent at West Coast refineries. So during the past three years when WTI traded at discounts to Brent of up to $28/Bbl as new domestic production was landlocked in the Midwest (see It’s Been Three Long Years), Alaskan producers were getting higher international prices for their crude than (for example) their domestic counterparts selling shale crude at discounts to WTI. That meant Alaskan producers were generally happy.
It seems that situation has changed enough in 2014 to let COP consider exporting some of their ANS production to Asia. The reasons for the change are likely twofold. First a recent fall in the premium of ANS over US domestic crude prices and second a longer-term concern about West Coast demand for ANS.
We’ll look at pricing first. The Brent premium to WTI has fallen steadily from a high close to $15/Bbl in early January to $3 - $4/Bbl in the last week of September (see the red line on Figure #1). At the same time the ANS premium to WTI has also declined in value from $9.53 at the beginning of January to a premium of just $1.62/Bbl on September 30, 2014 (see blue line in Figure #1). Part of the reason for the declines is that overall world crude prices are falling this year because supply has increased while demand remains stagnant. But within that big picture ANS prices are now a lot closer to WTI than they were at the start of the year - meaning that the “premium” of ANS over domestic crudes like WTI has shrunk. That shrinking premium is motivating Alaskan producers like Conoco to start looking at export opportunities in Asia for better prices than they can get on the West Coast.